Gold rush: China jewellers go west for growth

An employee arranges gold jewellery in the counter as her arm is reflected in the mirror at a gold shop in Wuhan, Hubei province August 25, 2011.
REUTERS/Stringer/Files

By Rujun Shen and Carrie Ho| SINGAPORE/ZHENJIANG, China

SINGAPORE/ZHENJIANG, China The smart young women and coiffured housewives browsing for rings and necklaces at a shiny new mall in a city on the Yangtze River could breathe fresh life into China's boom in gold consumption.

With jewellery stores already flooding shopping districts in Beijing and Shanghai, retailers are shifting their focus to smaller cities in hope of mining a rich seam of appetite for products which make up the bulk of gold-buying in a nation eclipsing India as the No.1 consumer of the precious metal.

Analysts and industry officials say that increasing wealth and spending power in less developed areas will help reinvigorate Chinese gold consumption, which is growing at a slower pace in 2012 after explosive gains in the past two years, with an economic slowdown making some shoppers think twice before purchasing big-ticket items.

"Third and fourth-tier cities are going to be the main engine of China's jewellery market," said Leon Zhao, a consulting director from research firm Frost & Sullivan's China operations.

The company reckons that Chinese cities at or below so-called third tier status will account for more than 40 percent of the country's total jewellery market by 2015, up from 34 percent in 2010 and 29 percent in 2006.

A slower economy this year has weighed on growth in Chinese demand for gold jewellery, with consumption in the first half of 2012 up less than 1 percent on the year to 250.4 tonnes, compared to a 13-percent increase in 2011, data from the World Gold Council (WGC), an industry body, showed.

But the push into smaller cities and resilience in interest in gold will help demand growth accelerate again, analysts said.

"I'd expect the total (jewellery sales) volume to grow at a double-digit rate in the next three years," said Yuan Yuan Ji, an analyst at Ji Asia in Hong Kong.

That should act as a shot in the arm for gold demand in the country, which is likely to grow at about 7 percent in 2012, slowing from a 22-percent increase last year, according to figures from metals consultancy GFMS, a unit of Thomson Reuters.

Jewellery demand accounted for two thirds of Chinese gold appetite in 2011, with the rest taken up by investors.

Appetite for gold in the world's most populous nation has underpinned rocketing global prices for the precious metal, which are set to rise for a twelfth straight year. Gold prices traded around $1,680 an ounce early this week, down 13 percent from a peak above $1,920 hit last year.

"Growing demand from China, as well as central bank gold purchases, the increasingly popularity of gold ETFs (exchange-traded funds) and robust buying from India have been driving gold prices higher," said Shi Heqing, an analyst at Antaike, a state-backed metals consultancy in Beijing.

And China is overtaking India as the world's biggest buyer of the metal, with key consumers in that country such as farmers hit by slower economic growth and steep prices due to a weak currency and higher import taxes.

China produced 361 tonnes of gold in 2011, which means over half of its demand, at more than 770 tonnes according to the WGC, came from imports.

Chinese cities are commonly assigned to tiers depending on their size and importance. Although there are no official criteria for this, Beijing, Shanghai, Guangzhou and Shenzhen are generally viewed as tier 1, while provincial capitals and a few affluent coastal cities are in the second tier.

Hong Kong-listed Chow Tai Fook Jewellery Group Ltd (1929.HK), the world's biggest jewellery retailer, said half the stores it has opened during the fiscal year starting in April are in third and fourth-tier cities, mainly concentrated in central and western China.

"In the past two to three years, as well as in the first half of this year, our retail outlets in tier 3 and tier 4 and in central and western parts of the country have performed better than those in coastal cities," said Kent Wong, managing director of the firm which competes with the likes of Tiffany & Co (TIF.N) and local players such as Luk Fook Holdings Ltd (0590.HK).

KEEPING ITS LUSTRE

At one of Chow Tai Fook's three outlets in Zhenjiang, a port city of 3 million on the banks of the Yangtze and over 200 kilometres west of Shanghai, 30-something Ms. Zhang was looking at gold pendants.

"I'm here shopping for myself," she said. "I'm looking at all kinds of gold including yellow and gold-plated items. Yellow gold retains its value well over time, while the other types look more modern."

While consumers in China's top cities are increasingly developing a taste for platinum, white gold and other non-gold products, those in smaller cities still prefer gold.

"Consumers in smaller cities emphasise value, rather than design or craftsmanship. They buy jewellery for celebrations such as weddings, or as a store of value," said Zhao from Frost & Sullivan.

Although the market share of gold products could decline in the future as these consumers become more sophisticated, gold's dominance is unlikely to fade in the next decade, he added.

And overall gold demand will fare well, with limited investment options and concerns about currency debasement as governments around the world pump cash into their troubled economies boosting the appeal of the precious metal, both for jewellery and investment, analysts said.

Indeed, jewellers hope that favourable economic policies from a transition of leadership in China at the Communist Party Congress that starts on Thursday should help broadly support luxury spending.

"If China doesn't grow, there is nowhere we can go," said Nancy Wong, an executive director at Luk Fook, which already has nearly 1,000 stores in China.

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